[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62849-62852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24675]
[[Page 62849]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70684; File No. SR-C2-2013-035]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Fees for the Complex Order Book Data Feed for C2 Listed
Options
October 15, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 30, 2013, C2 Options Exchange, Incorporated (the
``Exchange'' or ``C2'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
C2 Options Exchange, Incorporated (the ``Exchange'' or ``C2'')
proposes to amend the fee schedule of Market Data Express, LLC
(``MDX''), an affiliate of C2, to establish fees for the Complex Order
Book (``COB'') Data Feed for C2 listed options (``COB Data Feed'' or
``Data''). The text of the proposed rule change is available on the
Exchange's Web site (http://www.c2exchange.com/Legal/), at the
Exchange's Office of the Secretary, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The COB Data Feed is a real-time feed that consists of data
regarding the Exchange's Complex Order Book and related complex order
information. The COB Data Feed includes ``best bid and offer'' or
``BBO'' quotes and identifying information for all C2-traded complex
order strategies, as well as all executed C2 complex order trades (and
identifies whether the trade was a customer trade or whether a complex
order in the COB is a customer order). The COB Data Feed is currently
made available by MDX to all market participants free of charge.\3\
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\3\ See Securities Exchange Act Release No.70119 (August 5,
2013) (SR-C2-2013-025).
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The Exchange proposes to establish fees for the COB Data Feed. MDX
would charge Customers of the COB Data Feed $500 per month (``Data
Fee''). A COB Data Feed ``Customer'' is any entity that receives the
COB Data Feed, either directly from MDX's system or through a
connection to MDX provided by an approved redistributor (i.e., a market
data vendor or an extranet service provider), and distributes it
externally or uses it internally, except that an entity or person that
receives the COB Data Feed from a Customer and only uses it internally
is not a ``Customer'' if it receives the COB Data Feed from a Customer
subject to a form of ``Subscriber Agreement'' that has been approved by
MDX. The Data Fee for the COB Data Feed would be waived for Customers
of the COB Data Feed who are also Customers of the C2 BBO Data Feed.\4\
Customers of the C2 BBO Data Feed are currently charged $1,000 per
month by MDX.\5\ The proposed waiver of the Data Fee for the COB Data
Feed would allow a Customer of the COB Data Feed who is also a Customer
of the C2 BBO Data Feed to redistribute the COB Data Feed for no
additional charge.\6\
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\4\ The C2 BBO Data Feed is a real-time, low latency data feed
that includes C2 BBO data, consisting of all outstanding quotes and
standing orders at the best available price level on each side of
the market, with aggregate size and last sale data. The C2 BBO Data
Feed includes the data included in the COB Data Feed, among other
data. See Securities Exchange Act Release No. 69400 (April 18,
2013), 78 FR 24285 (April 24, 2013).
\5\ Id.
\6\ Such Customers would still be subject to User Fees as
described below.
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In addition, MDX would charge a Customer ``User Fees'' of $25 per
month per Device \7\ or user ID for receipt of the data by
``Professional Users'' \8\ and $1 per month for receipt of the data by
``Non-Professional Users.'' \9\ User Fees would be subject to a cap of
$500 per month, i.e., a Customer would pay no more than $500 in User
Fees in a month.
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\7\ A ``Device'' means any computer, workstation or other item
of equipment, fixed or portable, that receives, accesses and/or
displays data in visual, audible or other form.
\8\ A ``Professional User'' is any natural person recipient of
the COB Data Feed who is not a Non-Professional User. User Fees for
Professional Users are payable for both ``internal'' Professional
Users (Devices or user IDs of employees of a Customer) and
``external'' Professional Users (Devices or user IDs of Professional
Users who receive the Data from a Customer and are not employed by
the Customer). (Non-Professional Users must be external since a
person who uses the COB Data Feed for a commercial purpose cannot be
a Non-Professional User.)
\9\ A ``Non-Professional User'' is a natural person who uses the
COB Data Feed only for personal purposes and not for any commercial
purpose and who, if he or she works in the United States, is not:
(i) Registered or qualified in any capacity with the Securities and
Exchange Commission, the Commodities Futures Trading Commission, any
state securities agency, any securities exchange or association, or
any commodities or futures contract market or association; (ii)
engaged as an ``investment adviser'' as that term is defined in
Section 201(11) of the Investment Advisors Act of 1940 (whether or
not registered or qualified under that Act); or (iii) employed by a
bank or other organization exempt from registration under federal or
state securities laws to perform functions that would require
registration or qualification if such functions were performed for
an organization not so exempt; or, if he or she works outside of the
United States, does not perform the same functions as someone who
would qualify as a Non-Professional User if he or she worked in the
United States.
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The Exchange also proposes to make several formatting and clean up
changes to the MDX fee schedule. The Exchange proposes to create two
separate sections on the MDX fee schedule for the C2 BBO Data Feed and
the COB Data Feed and include the definitions applicable to each data
feed within its respective section. The Exchange proposes to renumber
the section on Systems Fees and move the definition of Port Fee within
that section. Finally, the Exchange proposes to delete the Definitions
section of the MDX fee schedule, including the provisions on invoicing
and late payments which are included within MDX's written agreement for
the data.
The proposed fees would be effective on October 1, 2013.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Securities Exchange Act of 1934
(``Act'') \10\ in general, and, in particular, with Section 6(b)(4) of
the Act \11\ in that it provides for the equitable allocation of
reasonable dues, fees and other charges among users and recipients of
[[Page 62850]]
the Data, and with Section 6(b)(5) \12\ of the Act in that it is not
designed to permit unfair discrimination between them. The Exchange
believes the proposed Data Fee and User Fees are equitable and not
unfairly discriminatory because they would apply equally to all
Customers of the COB Data Feed except the Data Fee would be waived for
Customers of the COB Data Feed who are also Customers of the C2 BBO
Data Feed. The Exchange notes that the fee structure of differentiated
professional and nonprofessional fees has long been used by other
exchanges for their products and by the Options Price Reporting
Authority (``OPRA'') Plan in order to reduce the price of data to
retail investors and make it more broadly available.\13\
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(4).
\12\ 15 U.S.C. 78f(b)(5).
\13\ See, e.g., Securities Exchange Act Release No. 67589
(August 2, 2012), 77 FR 47459 (August 8, 2012) (revising OPRA's
definition of the term ``Nonprofessional'').
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The Exchange believes the proposed waiver of the Data Fee is
equitable and not unfairly discriminatory because it would apply
equally to all Customers of the COB Data Feed who are also Customers of
the C2 BBO Data Feed. Customers of the C2 BBO Data Feed already pay MDX
$1,000 for the right to use and redistribute the data in the C2 BBO
Data Feed. The C2 BBO Data Feed includes the data in the COB Data Feed.
The proposed waiver of the Data Fee would allow a Customer of the COB
Data Feed who is also a Customer of the C2 BBO Data Feed to
redistribute the COB Data Feed for no additional charge, thereby
incentivizing further redistribution of the data in the COB Data Feed.
The Exchange notes other exchanges offer similar fee waivers.\14\
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\14\ The Exchange believes the NASDAQ Options Market charges
only one distributor fee to allow a subscriber access to its
``NASDAQ ITCH-to-Trade Options'' (ITTO) and ``Best of NASDAQ
Options'' (BONO) products. The Exchange believes NASDAQ OMX BX
charges only one distributor fee to allow a subscriber access to its
``BX Options Depth of Market'' (BX Depth) and ``BX Options Top of
Market'' (BX Top) products.
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The Exchange also believes the proposed fees are equitable because
the COB Data Feed is purely optional. Only those Customers that deem
the product to be of sufficient overall value and usefulness would
purchase it.
The Exchange believes the proposed fees are reasonable because they
compare favorably to fees that other markets charge for similar
products. For example, the Exchange believes The International
Securities Exchange (``ISE'') offers a ``Spread Feed'', which like the
COB Data Feed includes order and quote data for complex strategies. The
Exchange believes ISE charges distributors of its Spread Feed $3,000
per month and a monthly controlled device fee of $25 per controlled
device for Professionals.
The Exchange notes that the COB Data Feed also competes with
products offered by NASDAQ OMX PHLX and NYSE. NASDAQ OMX PHLX offers a
market data product entitled ``TOPO Plus Orders'', which like the COB
Data Feed includes order and last sale information for complex
strategies and other market data. NYSE offers market data products
entitled ``NYSE ArcaBook for Amex Options'' and ``NYSE ArcaBook for
Arca Options'' that include top-of-book and last sale data for complex
strategies similar to the data in the COB Data Feed.
The Exchange believes that the proposed cap on User Fees is
reasonable because it may encourage more vendors to choose to offer the
COB Data Feed, thereby expanding the distribution of this market data
for the benefit of investors.
The proposed formatting and clean-up changes to the MDX fee
schedule will benefit Customers and users by making the fee schedule
clearer and easier to understand.
For the reasons cited above, the Exchange believes the proposed
fees for the COB Data Feed are equitable, reasonable and not unfairly
discriminatory. In addition, the Exchange believes that no substantial
countervailing basis exists to support a finding that the proposed fees
for the COB Data Feed fails to meet the requirements of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\15\ C2 does not
believe that the proposed rule change will impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. An exchange's ability to price its proprietary
data feed products is constrained by (1) the existence of actual
competition for the sale of such data, (2) the joint product nature of
exchange platforms, and (3) the existence of alternatives to
proprietary data.
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\15\ 15 U.S.C. 78f(b)(8).
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The Existence of Actual Competition. The Exchange believes
competition provides an effective constraint on the market data fees
that the Exchange, through MDX, has the ability and the incentive to
charge. C2 has a compelling need to attract order flow from market
participants in order to maintain its share of trading volume. This
compelling need to attract order flow imposes significant pressure on
C2 to act reasonably in setting its fees for market data, particularly
given that the market participants that will pay such fees often will
be the same market participants from whom C2 must attract order flow.
These market participants include broker-dealers that control the
handling of a large volume of customer and proprietary order flow.
Given the portability of order flow from one exchange to another, any
exchange that sought to charge unreasonably high data fees would risk
alienating many of the same customers on whose orders it depends for
competitive survival. C2 currently competes with eleven options
exchanges (including C2's affiliate, Chicago Board Options Exchange)
for order flow.\16\
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\16\ The Commission has previously made a finding that the
options industry is subject to significant competitive forces. See,
e.g., Securities Exchange Act Release No. 59949 (May 20, 2009), 74
FR 25593 (May 28, 2009) (SR-ISE-2009-97) (order approving ISE's
proposal to establish fees for a real-time depth of market data
offering).
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In addition, in the case of products that are distributed through
market data vendors, the market data vendors themselves provide
additional price discipline for proprietary data products because they
control the primary means of access to certain end users. These vendors
impose price discipline based upon their business models. For example,
vendors that assess a surcharge on data they sell are able to refuse to
offer proprietary products that their end users do not or will not
purchase in sufficient numbers. Internet portals, such as Google,
impose price discipline by providing only data that they believe will
enable them to attract ``eyeballs'' that contribute to their
advertising revenue. Similarly, Customers will not offer the COB Data
Feed unless this product will help them maintain current users or
attract new ones. For example, a broker-dealer will not choose to offer
the COB Data Feed to its retail customers unless the broker-dealer
believes that the retail customers will use and value the data and the
provision of such data will help the broker-dealer maintain the
customer relationship, which allows the broker-dealer to generate
profits for itself. Professional Users will not request the COB Data
Feed from Customers unless they can use the data for profit-generating
purposes in their businesses. All of these operate as constraints on
pricing proprietary data products.
Joint Product Nature of Exchange Platform. Transaction execution
and proprietary data products are
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complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade executions are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platforms where the order can be posted, including
the execution fees, data quality, and price and distribution of their
data products. The more trade executions a platform does, the more
valuable its market data products become. The costs of producing market
data include not only the costs of the data distribution
infrastructure, but also the costs of designing, maintaining, and
operating the exchange's transaction execution platform and the cost of
regulating the exchange to ensure its fair operation and maintain
investor confidence. The total return that a trading platform earns
reflects the revenues it receives from both products and the joint
costs it incurs. Moreover, an exchange's broker-dealer customers view
the costs of transaction executions and market data as a unified cost
of doing business with the exchange.
Analyzing the cost of market data product production and
distribution in isolation from the cost of all of the inputs supporting
the creation of market data and market data products will inevitably
underestimate the cost of the data and data products. Thus, because it
is impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, system costs and regulatory costs affect the price of both
obtaining the market data itself and creating and distributing market
data products. It would be equally misleading, however, to attribute
all of an exchange's costs to the market data portion of an exchange's
joint products. Rather, all of an exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including 12 options self-regulatory organization (``SRO'') markets, as
well as internalizing broker-dealers (``BDs'') and various forms of
alternative trading systems (``ATSs''), including dark pools and
electronic communication networks (``ECNs''). Competition among trading
platforms can be expected to constrain the aggregate return that each
platform earns from the sale of its joint products, but different
platforms may choose from a range of possible, and equally reasonable,
pricing strategies as the means of recovering total costs. For example,
some platforms may choose to pay rebates to attract orders, charge
relatively low prices for market data products (or provide market data
products free of charge), and charge relatively high prices for
accessing posted liquidity. Other platforms may choose a strategy of
paying lower rebates (or no rebates) to attract orders, setting
relatively high prices for market data products, and setting relatively
low prices for accessing posted liquidity. In this environment, there
is no economic basis for regulating maximum prices for one of the joint
products in an industry in which suppliers face competitive constraints
with regard to the joint offering.
The Existence of Alternatives. C2 is constrained in pricing the COB
Data Feed by the availability to market participants of alternatives to
purchasing the COB Data Feed. C2 must consider the extent to which
market participants would choose one or more alternatives instead of
purchasing the exchange's data. Other options exchanges can and have
produced their own complex strategies market data products, and thus
are sources of potential competition for MDX. As noted above, ISE,
NASDAQ OMX PHLX and NYSE offer market data products that compete with
the COB Data Feed. The large number of SROs, BDs, and ATSs that
currently produce proprietary data or are currently capable of
producing it provides further pricing discipline for proprietary data
products. Each SRO, ATS, and BD is currently permitted to produce
proprietary data products, and many currently do.
Further, data products are valuable to professional users only if
they can be used for profit-generating purposes in their businesses and
valuable to non-professional users only insofar as they provide
information that such users expect will assist them in tracking prices
and market trends and making trading decisions. The Exchange believes
that the proposed waiver of the Data Fee and the cap on User Fees,
which may permit wider distribution of the COB Data Feed at a lower
cost to Customers with a large number of Professional and Non-
professional Users, may encourage more users to demand and more
Customers to choose to offer the COB Data Feed, thereby benefitting
Professional and Non-professional Users, including public investors.
The existence of numerous alternatives to the Exchange's products,
including proprietary data from other sources, ensures that the
Exchange cannot set unreasonable fees, or fees that are unreasonably
discriminatory, when vendors and subscribers can elect these
alternatives or choose not to purchase a specific proprietary data
product if its cost to purchase is not justified by the returns any
particular vendor or subscriber would achieve through the purchase.
The COB Data Feed is voluntary on the part of the Exchange, which
is not required to offer such services, and voluntary on the part of
prospective Customers that are not required to use it. The Exchange
believes the COB Data Feed offered by MDX will help attract new users
and new order flow to the Exchange, thereby improving the Exchange's
ability to compete in the market for options order flow and executions.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
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Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-C2-2013-035 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-C2-2013-035. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-C2-2013-035 and should be
submitted on or before November 12, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24675 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P